But with the Ben Graham formula in the stock analysis software, instead of using 1.5 x growth, I’ve adjusted it down to simply 1x growth.

After calculating and valuing hundreds of companies with the formula and testing its robustness, I’ve concluded that using 1x is the best way to go.

Why Ben Graham Created This Valuation Formula

It’s no secret that Graham was a cheap stock investor who bought baskets of stocks instead of concentrating.

His approach was much more mechanical.

His first criteria was cheapness and that was usually enough. But after going through countless number of stocks, here’s what he says.

Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the valuation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations. – The Intelligent Investor

In 3 short bullets, he used the formula himself for;

Shorthand

Simplicity

Estimate of intrinsic value

It’s definitely not the golden rule and it’s not something he went with blindly, but it’s a good approximation and a good starting point to use in your investigation.

After all, Buffett says that

It is better to be approximately right, than precisely wrong.

The great thing about the Graham formula is that it can be applied to any company with a positive EPS.

Although EPS is not ideal, when you are trying to study and value businesses with negative FCF, weak balance sheet and low EBIT, you only have EPS and past or expected growth to work with.

Relative valuation such as PE multiples compared to peers isn’t a method that I use often.

Relative multiples don’t account for the market value. In a hot market, everything can look expensive, while a bear market can make things look cheap.

Quick Filtering Process Explained

I have a process of valuing stocks.

If you’re not sure about your own, here’s a guide I made a while back that you can reference and use to tweak your own.

The way I go about doing things is much different now.

The first thing I do is to simply calculate a quick and dirty valuation of a company.

Graham’s formula obviously helps a lot with this, but I have about 8 valuation tools to choose from depending on the type of company I’m looking at.

The good thing about having a lot of valuation models in your toolbox is that you’re not stuck trying to fit a square into a circle.